CFPB Closing Costs Limit Makes QM Loans Unprofitable: Onsite Coverage

BOSTON — The Consumer Financial Protection Bureau’s qualified mortgage rule that limits closing costs to 3% of the loan balance will have such a big impact on Midwestern credit unions, one Minnesota-based executive said he’d lose money if he complied.

Jeff Schwalen, president/CEO of the $918 million Hiway FCU, presented the problem during an afternoon breakout session on new mortgage rules Tuesday at NAFCU’s 46thAnnual Conference in Boston.

Schwalen said the 3% closing costs restriction won’t cover his costs for mortgage loans under $135,000. That’s a problem in Minnesota, where the average mortgage loan is just $180,000 – Hiway FCU is headquartered in St. Paul – so he’s going to make non-QM loans.

For example, for a $50,000 mortgage loan, Schwalen said actual costs in Minnesota are $2,613. However, 3% of that balance is just $1,500, resulting in a $1,113 net loss on the loan. A $135,000 mortgage would bring in a maximum of $4,050 in closing costs, but costs the credit union $75 more to make the loan.

In comparison, a $400,000 mortgage could generate up to $12,000 in closing costs and still comply with the qualified mortgage 3% closing costs limit. That would produce a $3,307 net profit for Hiway; however, mortgages of that size are more common on the coasts than in the Midwest, he said.

“So you can see how this percentage thing works to our disadvantage,” he said. “But, it’s an opening for us to fill that void in the marketplace.”

Hiway FCU books approximately $10 million in mortgage loans per month, and Schwalen said he currently holds about half of those loans on the books and sells the other half to Fannie Mae. When the GSEs stop purchasing non-QM loans next year, Schwalen said he’ll hold the smaller dollar loans that aren’t qualified mortgages on his books, because they will pose less interest rate risk.

Schwalen also said the 3% closing cost limit has also impacted his credit union’s wholly owned title company, which the 60,428-member Hiway FCU launched to help save members money on closing costs.

“But it’s ironic, because currently titles are included as a part of that 3%,” he said. “So, you’re really not going to help yourself doing qualified mortgages.”

He added that the CFPB has said it is reconsidering whether to include title costs in the 3% closing costs limit, and not only is NAFCU advocating for titles to be included in a closing cost exemption, his credit union is also contacting its legislators to push the issue.